Getting rich is usually the motive behind becoming a real estate investor. However, the road to gold starts with learning about real estate topics like how to conduct real estate market analysis. Investment property analysis is one of the first things beginner real estate investors need to learn; it is not a very complicated process, and with the right guidance you will be able to fully understand what it takes to perform a real estate market analysis when selling or buying an investment property.
In this article, we will focus on explaining what real estate market analysis is, its importance, how to perform it, and the best tool for real estate market analysis.
For beginner real estate investors, Mashvisor can be your basic guide to a better understanding of the real estate market in general and your US local housing market in particular.
So, let’s start with defining real estate market analysis.
1. What Does Real Estate Market Analysis Mean?
Real estate market analysis, also known as comparative market analysis (CMA), is the process in which a property’s value is determined based on the real estate market’s value of similar properties (or real estate comps) in the same geographical area. These comps also have to be recently sold properties or at least listed for sale.
It is worth mentioning that real estate comps should be between 1-3 miles away from the investment property in question. In addition, when conducting real estate market analysis, you should only consider properties sold within 3-6 months. Usually, no less than three properties are used for comparison.
Please note that real estate market analysis is not the same as a property appraisal, thus, it lacks the financial and legal value.
Related: Real Estate Investing Terminology: Comparative Market Analysis
2. Why Is Real Estate Market Analysis Important?
Real estate market analysis is considered one of the most essential steps for professional and beginner real estate investors alike, because it helps them determine the estimated value of the income property they’re willing to buy, sell, or rent out.
Investment property analysis helps you understand the current housing market state and how much investment properties similar to yours are worth. Therefore, if you’re looking to rent out your property, market analysis helps you decide on how much to charge for monthly rent. It is worth mentioning that the rent is usually between 0.8% and 1.1% of the house’s value. In addition, investment property analysis is crucial in determining the listing price of your real estate property. By comparing your investment property to similar properties on the housing market, you can easily put a price on your rental property.
However, it is important to remember that current real estate market listings aren’t 100% correct, as they’re subject to estimation. It is worth mentioning that the seller’s market goes for the highest prices, while the buyer’s market decides on the lowest prices when it comes to investment properties values.
3. How to Perform Real Estate Market Analysis?
Investing in real estate requires certain knowledge of the real estate investor’s local housing market. As a property seller, a property buyer, or a landlord, paying attention to investment properties similar to your subject property in the same area can be very helpful and will provide you with realistic data on what to expect when renting your property, making an offer on a property, or listing your house on the market.
So how do you perform real estate market analysis?
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Pay Attention to Location!
Location is one of the biggest aspects in the world of real estate investments; every property’s worth is affected by its location. In the case of investment property analysis, location is important due to two reasons: First, performing real estate market analysis requires that the property in question be compared to other similar properties located in the same area. Second, the property should be located in an attractive area to be of great value; that is not to say that location is the only thing that matters when investing in a property, but it definitely is one of the most important features.
A house that is close to public transportation, schools, business centers, main roads, and public facilities is for sure a very hot investment in your local housing market. To know an estimated value for that house, you need to compare it to investment properties located in the same or similar areas and were sold in the last 6 months or listed on the real estate market.
As important as the location of an investment property is, it is not the only thing to take into consideration when conducting a real estate market analysis. Let us move to the next important feature in investment property analysis.
Related: These Are the Best Real Estate Investment Locations in the US Right Now
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Examine the Main Characteristics of the Investment Property
Any buyer looking to invest in a property takes into consideration major characteristics that determine whether the investment property is worth the money or not. The property seller also looks into these characteristics in his/her property to decide on its price. These characteristics include: square footage, house age, and the number of floors, bedrooms, and bathrooms.
Performing a real estate market analysis also includes looking into amenities like: pools, fireplaces, a central heating system, and so on. It is also important to make note of all the recent improvements done to the house, as they play a role in making the house look more appealing to buyers. After that, you look into houses with similar characteristics. For example, comparing your pool-less house to one that has a big pool will not be sufficient since your house will prove less worthy. The same thing applies to the age of the house; you need to find real estate comps that were built in the same era (you can’t compare a property built in 2000 to one that was built in the 1950s, for example, even if they have the same number of rooms and floors). After comparing your property to similar ones in the same area currently on the market or sold recently, you can determine where your property fits within the range of prices.
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Compare the Data
There are two main non-physical characteristics that are also taken into consideration during a real estate market analysis: vacancy rate and price per square foot.
1. Vacancy rate: Comparing your investment property to other similar properties allows you to have an idea about the vacancy rate of these properties and how it affects the rental income, for example. It also helps you decide on a monthly rental income through the comparison of the other properties rents by month.
2. Price per square foot: It is important to know that the price varies depending on the square foot. If two real estate properties are different in size, the bigger property’s price by square foot will be less than the smaller property.
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Adjust Comps Values
While performing real estate market analysis, you will notice that not all real estate comps are exactly the same. Sometimes, most of the characteristics match but for one or two. Make sure you jot that down during your investment property analysis in order to calculate. For example, if your investment property has four bedrooms and a comp has three, then you have to add the additional bedroom’s value to the estimated value of your real estate property to have a more precise evaluation.
4. The Best Tool for Real Estate Market Analysis – Investment Property Calculator
Real estate investing tools are used to save time and effort by both professional and beginner real estate investors alike. One of the best real estate investing tools is the investment property calculator. This essential tool is important due to the fact that it provides calculations of cash on cash return, cash flow analysis, and cap rate.
Mashvisor’s investment property calculator is designed to collect data related to investments in your neighborhood/area and your own property through performing comparative and predictive analyses. The investment property calculator also provides info on future trends and results based on previous old data.
To learn more about the investment property calculator, head to Mashvisor to find loads of information on this important tool.
Related: Mashvisor’s Investment Property Calculator: Real Estate Investing Made Easier
Bottom Line
Getting rich by investing in real estate is not a pipe dream. In fact, it is very likely to happen with the right knowledge and management. Real estate market analysis is one of the things beginner real estate investors need to enrich themselves with in order to set their first steps in the field of real estate investments.
If you’re looking for current listings across the US, visit Mashvisor to find what you’re looking for and more information regarding real estate investments and more on this field.
